Saturday, June 14, 2008

China Learns the Farm Subsidy Game

China’s leaders are congratulating themselves on policies that have largely insulated China from the world food price crisis. A June 13 news item reports on farmer Jiao Xiqing in ShandongProvince who has just brought in another big wheat harvest from his 3 mu (half an acre) of land. Farmer Jiao takes time from planting corn to tell the reporter that he got subsidies of 80 yuan per mu (that would be a total of 240 yuan or $35) and he will gross 2,500 yuan ($362) on the 3 mu of wheat, and that’s not including what he’ll get from the corn he’ll harvest in the fall. The article says that another big harvest of summer grain means that China will have a fifth-consecutive big grain harvest.

The article points out that relatively stable grain prices in China are a sharp contrast to the high prices in world markets. The officials interviewed in the article give credit to China’s policies. The vice-director of the Grain Bureau, Zeng Liying, tells us, “Production is the basis for grain security.” She goes on to explain that China implemented several policies to reverse falling grain production several years ago, including direct subsidies and “protection prices.”

In 2004, China made an historic shift from taxing farmers to subsidizing them, just like the big boys do in North America and Europe. When China was preparing to enter the WTO there was a lot of angst over how its farmers would be able to compete with big subsidized farmers overseas. Chinese officials began devising and experimenting with “countermeasures”: farm subsidies and support prices. By 2004 they were ready to roll out their program, getting additional impetus from a Chinese food price inflation scare in 2004 that most people have forgotten now.

The farm subsidy program was started in 2004 with tiny payments of 10 yuan per mu (about $1.20 at the time) that was given to farmers in 13 important grain-producing provinces. There was also a murky “quality seed” subsidy and a subsidy for buying large machinery. Year by year the subsidies have been raised. Local governments can kick in money too. They also started paying support prices for wheat and rice. The support prices were increased in May. On top of this, they started paying a subsidy to offset rising prices of fertilizer and fuel this year that is even bigger than the grain subsidy. (There are also subsidies for the dairy industry, hog breeding, and large poultry farms.)

The article cited above tells us that the subsidy in Shandong was raised from 30 yuan last year to 80 yuan per mu this year. In JiangxiProvince it’s 130 yuan. In NingxiaProvince the subsidy is 50.1 yuan/mu for irrigated land and 13.4 yuan for dryland.

It’s not clear whether these subsidies are (will be) considered “green box” (not linked to production) or “amber box” (potentially distorting subsidies linked to production) when reported to the WTO. But this news report clearly credits the subsidies with raising grain production because income from grain is more attractive compared with growing other crops or leaving to work in the city.

Chinese officials have it good. They can brag about how farmers are thrilled to earn a gross income of $362. Officials in Beijing can easily blow that much in a single night of banqueting. In fact, there’s a good chance that Farmer Jiao’s daughter has left the farm to work as a karaoke hostess at the restaurant where the Grain Bureau officials have their banquets. The several hundred yuan that his daughter sends home every month is what really keeps farmer Jiao happy. That’s what finances his home remodeling and his flat-screen T.V. The wheat money probably doesn’t go too far, even in the Shandong countryside.

Oh, and how do the Grain Bureau officials finance their banquets? Well, they’re sitting on grain reserves of about 150-200 million metric tons. That’s worth somewhere around $50 billion at current prices locked up in warehouses (some of it rotting or serving as rat food). They could sell 10-20 million metric tons on world markets and never miss it, plus make millions of dollars in profits. But they don’t because the government keeps writing checks, paying them to store it in the name of maintaining “grain security.”

When Chinese officials trumpet the effectiveness of their policies, perhaps they should calculate the cost of their “grain security.”